The IMF Executive Board on February 20, concluded the 1998 Article IV consultation1 with Singapore.*

Background

Singapore’s economy, which is very sensitive to developments in the world electronics market, experienced a slowdown in mid-1996, mainly on account of the decline in the global demand for computers and semiconductors which dampened manufacturing output and exports. The slowdown was helpful in reducing the positive output gap that had built up during 1993-95 as a result of the near double-digit expansion posted in those years. Consumer price inflation, which had averaged about 2 percent in Singapore over the previous decade, fell to a low of 1.4 percent in 1996, and property price inflation, which had averaged 30 percent annually during 1993-95, fell to 5 percent in 1996, following measures introduced in May to curb speculative demand in the private residential housing market. The slowdown of mid-1996 proved short-lived, however, with activity picking up in the last quarter of the year and further in 1997, fueled by a rebound in the global electronics market and an easing of macroeconomic policies.

As a result, for 1997 as a whole, growth increased to nearly 8 percent while consumer price inflation picked up to 2 percent. By contrast, property prices fell 12 percent in 1997, reflecting the impact of the May 1996 measures and additional policies introduced in April 1997 aimed at the resale market for public housing. The external current account remained in very sizable surplus in 1997, and reserves—although falling in US$ terms in the second half of the year—remained at about 7 months’ import cover at the end of the year.

At end-1997, local financial institutions had capital ratios above the mandated 12 percent level, and were fully provisioned for classified loans, which represented 2.3 percent of global assets. Aggregate loan exposure of local banks (including their overseas branches and subsidiaries) to Malaysia, Indonesia, Thailand, Korea, and the Philippines constituted 16 percent of total assets at end-1997. The proportion of classified loans among the banks’ regional loans was 5.7 percent. Exposure to the local property sector was also sizable, comprising about one-third of total domestic bank lending.

With regard to fiscal policy, which has a medium-term focus in Singapore, the primary operating surplus declined from 6 percent of GDP in FY 1995/96 (April-March) to 4 percent in FY 1996/97, reflecting mainly sizable increases in development expenditures associated with a number of infrastructural projects. A further decline to about 3 percent is targeted in the FY 1997/98 budget. A number of fiscal incentives to the financial sector (especially to boost activity for Asian Currency Units and fund management) were included in the current budget.

Monetary policy, which is the principal instrument of demand management and is centered on the exchange rate, was eased in response to the economic slowdown and the benign outlook for inflation. As a result, rather than appreciating by about 3 percent a year as it has for the past decade, the nominal effective exchange rate (as calculated by the IMF) depreciated by about 1 percent during 1997. The real effective exchange rate (on a similar basis) also depreciated slightly during 1997. In response to heightened regional currency instability since July, the authorities allowed the nominal effective value of the Singapore dollar to fluctuate within a wider range.

In line with regional developments, the Singapore dollar experienced several bouts of downward pressure against the U.S. dollar since mid-1997, resulting in a cumulative bilateral depreciation of 12 percent through mid-February. Singapore’s main stock market index declined by about 20 percent over the same period.

Executive Board Assessment

Executive Directors noted that, over the past 18 months, Singapore had been faced with a number of economic challenges—including the slowdown in the electronics industry, a downturn in equity and property markets, and regional financial market turbulence—and they commended the authorities for managing their economic policies successfully under difficult circumstances. They noted that Singapore’s strong fundamentals—including its high saving rate, large fiscal and external current account surpluses, flexible markets, robust reserve position, and high standard of regulation and supervision for domestic financial institutions—had helped to shield its financial market from the regional turmoil and had allowed foreign investors to remain confident about Singapore’s short- and medium-term prospects.

However, Directors observed that there are still downside risks associated with the regional economic slowdown, and that, even in the absence of further unexpected regional spill-overs, growth in Singapore will slow down sharply this year, and the negative output gap is expected to widen. In these circumstances, and given the strength of the external and fiscal positions, Directors saw the small reduction in the primary operating surplus envisaged for FY 1997/98 as appropriate. They suggested that, in moving toward the medium-term objective of a lower primary operating surplus, corporate and personal income tax rates should be reduced in next year’s budget alongside the intended increases in development expenditure.

Directors endorsed the authorities’ intention to maintain an easier monetary policy stance as long as the inflationary outlook remains subdued, but to review the stance at frequent intervals to ensure that inflation remains low. They supported the recent increase in the flexibility of exchange rate policy, given the volatility of regional currencies, although a renewed trend appreciation of the Singapore dollar would be appropriate once the regional situation stabilizes and output returns to its potential level. They considered that market-driven hikes in interest rates should not be resisted during periods of currency turmoil.

Directors noted that available indicators suggested that Singaporean banks and finance companies were sound, with high capital ratios and low levels of classified loans in relation to portfolios. However, given their exposure to the region and to the local property market, Directors noted that the financial position of Singaporean financial institutions would probably deteriorate in the near future as provisioning for classified loans increased. While the authorities remained confident that the financial system would weather the storm, Directors cautioned that timely monitoring would continue to be essential, in view of the risks of further declines in property prices and a deterioration in the quality of the regional portfolio. To enhance confidence, Directors urged that disclosure standards of individual banks be improved, including with respect to their regional exposure, capital ratios, level of nonperforming loans, and level of hidden reserves. In view of the strength of the banking sector, this would reduce the risk of unwarranted contagion.

Directors welcomed the new package of measures introduced in November 1997 to help stabilize the property and construction sectors. They encouraged the authorities to closely monitor credit growth in these sectors.

With the recent recovery in export growth, Directors were of the view that the earlier slowdown appears to have been primarily cyclical. While the depreciation of regional currencies would have some impact on Singapore’s exports, this effect would be constrained by the limited extent of export market competition with the regional economies. This said, continued restructuring of the economy into higher value-added sectors and upgrading of the skill level of the workforce were essential to safeguard Singapore’s competitiveness over the medium term.

Several Directors felt that further steps to ease restrictions on the internationalization of the Singapore dollar would be appropriate and in the long-term interest of Singapore as a regional financial center. They stressed that Singapore’s strong fundamentals and healthy reserve position would tend to mitigate any costs associated with possibly greater volatility of capital flows. However, some Directors, noting that the existing restrictions, backed by strong fundamentals, had helped to mitigate the impact of regional speculative pressures on Singapore, suggested that a cautious approach in eliminating the restrictions would be warranted in present circumstances. Directors welcomed the recent recommendations made by the Subcommittee on Finance and Banking of the Committee on Competitiveness aimed at securing Singapore’s position as a regional financial center. They noted the positive market reaction and encouraged the authorities to follow up on these recommendations as soon as possible.

Directors called attention to the limitations in published statistics relating to the external sector—including the coverage of the trade and services accounts of the balance of payments and the absence of data on external assets and liabilities vis-à-vis nonresidents. They urged the authorities to address these promptly to enhance the analysis of external policies. With respect to public sector data, Directors urged the authorities to increase transparency regarding holdings of government assets abroad and the net open forward position of the Monetary Authority of Singapore, and to broaden the coverage and to improve the breakdown of the public sector accounts so as to facilitate economic analysis.

Directors welcomed Singapore’s ongoing efforts with respect to the provision of regional technical assistance, including the recent agreement to open the IMF-Singapore Regional Training Institute in May 1998.

Press Information Notices (PINs) are issued, at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF’s assessment of these policies.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. In this PIN, the main features of the Board’s discussion are described.